24. Taxes Payable - Corp

Question 1

8What are the three Division C Deductions for Corporations?

Answer 1

• Charitable Donations (Limited to 75%) - Carry forward 5 years
• Dividends (from corp. resident in Canada)
• Loss Carryfowards
  incl:
  non capital
  capital
  ABIL
  Farm losses
  Restricted Farm losses

Question 2

What is the small business deduction

Answer 2

Lowers the tax rate on ABI earned by a CCPC.

19% of the Lesser of the following:
- ABI in Canada

• Taxable Inc - [(100/28) x FTC on Non-business income and 4 x FTC on Foreign business income
• Annual Limit of $500,000, reduced by:

A/(B/11,250)

A: 500,000
B: .225% of TEC excess of $10,000,000 in the previous year

A/500,000 x 5 x (aaii - 50,000)

Question 3

What is TEC?

Answer 3

TEC is taxable capital employed in Canada

To calculate:
Add:
Share Capital
Contributed Surplus
Retained Earnings
Reserves not deductible
Loans & Advanced Payment
Indebtedness - bonds, debentures, notes, mortgages

Less:
Allowance for investments in debt and equityof other corporations

x 10% (Federal abatement)

= TEC in Canada

Question 4

How do you calculate Foreign-tax credits?

Answer 4

Non-business Income Tax Credits:
Lesser of:
1) Foreign taxes paid
2) (Net Foreign non-business income/Adjusted net income) x tax otherwise payable

Business Income:
Lesser of:
1) Foreign taxes paid
2) (Foreign business income/Adjusted net income) x tax otherwise payable
3) Basic Part I tax less non-business FTC.

Adjusted net income:
Net Income - Capital loss of other years deducted - dividends deducted under Div C

taxes otherwise payable:
non-business: federal, abatement, ART, GRR

business: federal and GRR

no abatement because not allocated to provinces

Question 5

How do you calculated M&P Deductions?

Answer 5

13% of the lesser of:
1) M&P Profits - amounts eligible for SBD
2) Taxable Income less:
- Amount eligible for SBD
- 4 x FTC on foreign business credit
- AII (CCPC only)

Question 6

How do you calculate Aggregate Investment Income (AII)

Answer 6

AII included in NIFTP:
Interest income
Net Rental Income
Royalty Income
Dividend Income
Net Taxable Capital Gains

AII Included in Taxable Income
Less: Dividends deducted under Div C
Less: Net Capital loss carry-forward deducted under Div C

Question 7

How do you calculate GRR?

Answer 7

13% of full rate income:
Full rate income can be calculated:
Taxable income
Less:
Income eligible for SBD
Income eligible for M&P Deduction
AII in Taxable Income

Question 8

How do you calculate Active Business income?

Answer 8

NIFTP
Less: AII in NIFTP
Less: Foreign business income
= ABI earned in Canada

Question 9

What are Investment tax credits?

Answer 9

The most noteable is SRED.

Essentially - qualifying expenditures are added to a SRED pool, which can then be deducted as a credit or refunded at 35% pool within expenditure limit, 15% after, and 100% of the credit (40% after Qualifying corp or 0% after CCPC), 15% flat for qualifying expenditures only for non-CCPC and no refunds.

Criteria for expenditures:
engineering
desigining
research
analysis
proramming
cdata collection
testing

excluded activities:
market researhc/advertising
quality control/routine testing
social science research or humanities
exploring, drilling, etc,
commercial production
style changes
routine data collection
activities outside of canada

Limit is $3 mil, but is ground down. See SRED notes

Question 10

What is ART?

Answer 10

It is additional refundable tax leveraged onto investment income to prevent individuals from taking advantage of small businesses as a vehicle to defer personal taxes via inactive income.

It is 10 2/3% of the lesser:
AII in taxable income
taxable income - amount eligible for SBD

However, because this taxes investment income earned in a corporation at a much higher rate (opposite of integration), corporations receive a dividend refund when dividends (eligible or non-eligible) are issued to a shareholder.

Question 11

Why do we get foreign tax credits?

Answer 11

Foreign business and property income is included in taxable income of Candian corporations, and Canadian taxes are paid on that income - FTCs are granted so that income isn’t double taxed by both Canadian and foreign entities.

Question 12

How do you calculate FTC for non-business income?

Answer 12

Lesser of:
a) foreign tax paid
b) net foreign non-business income / adjusted net income x tax otherwise payable

Question 13

How do you calculate FTC for business income?

Answer 13

Least of:
a) foreign tax paid
b) net foreign business inc/adjuste net income x tax otherwise payable
c) basic part I tax non-business FTC

Question 14

What is Part IV tax?

Answer 14

Because the dividends act as such an attractive vehicle for corporations to defer income via holding companies, there is additional tax to prevent the deferral of tax leveraged on dividends received.

Part IV refundable tax is:
38 1/3% of dividends received from non-connected Canadian Coroprations
+
Investor’s share of dividends received by a connected corporation

Question 15

What are RDTOHs?

Answer 15

These are refundable tax based on the additional taxes leveraged on investment income (ART and Part IV Tax).

These include both ERDTOH and NERDOTH

Question 16

What is the formula for EDTOH?

Answer 16

Beg Bal
Less: Dividend refund from PY
Plus: Part IV tax paid on eligible dividends received in the year

Question 17

What is the formula for NERDTOH?

Answer 17

Beg Bal
Less: dividend refund from PY
Plus: Part IV tax on non-eligible dividends received in the year
Plus: Refundable portion of Part I tax on investment income

Question 18

How do you calculate refundable portion of Part I tax on investment income?

Answer 18

Lease of:

30.67% of AII - Non-business FTC - 8% of foreign investment income

30.67% of:
Taxable income
Less: Amount eligible for SBD
Less: 100/23 x non-busniess FTC
Less: 4 x business FTC

Part I Tax

Question 19

What are eligible dividends and how do they arise?

Answer 19

Eligible dividends are dividends that are paid out from full rate income - because of this, they have favourable tax credits which are beneficial to the tax payers.

As a result, non-eligible dividends must be paid out first to prevent deferal of taxes from non-eligible dividends forever

Question 20

What are non-eligible dividends and how do they arise?

Answer 20

Non-eligible divdends are dividends that are paid out from income that are not taxed at the full rate (income that has received GRR, SBD, etc).

Must be paid out first if there is a NERDOTH balance

Question 21

What is GRIP and how do you calculate it?

Answer 21

GRIP - Generate Rate Income Pool, this reflects the taxable income that has not benefited from the small business deduction or other special tax rates.

Prior year GRIP Balance
Add: 72% of Adjuted taxable income
Add: Eligible dividends received
Less: prior year eligible dividends paid

Note: Eligible dividends are paid throughout the year, but you can only determine the balance at year end, therefore, you can easily run over that balance.

Penalities: 20% on excess
Intentional is 30$

Question 22

How do you calculate LRIP?

Answer 22

Prior year closing
Add: non-eligible dividends received
Less: Non-eligible dividends paid

This can be calculated whenever, and must be paid first before eligible dividends.